Comparison of Key Economic Variables between the United States and China - Essay Example

Comparison of Key Economic Variables between U.S.A and China Lecturer: Over the period from 1997-2011, the United States has grown at an average of 2.4% whereas the Chinese economy has grown at a rate of 9.9%. (Refer to tables (a) and (b)).The statistics obviously show that the rate of growth is a higher in China compared the United States. The balance of trade shows a surplus for the Chinese whereas the American balance of trade shows negative balance hence a deficit. This is occasioned by higher import volumes compared to the exports. The world economic downturn of 2008-2009 appear to have greatly impacted on the US economy given that it realized a negative economic growth during this period whereas the Chinese economy did not register a big hit as the rates appear to be more less constant. China’s rapid growth can be attributed to its vast and cheap labor force. China’s high population has ensured a constant and high supply of cheap labor especially from the rural areas. This has led to lower costs of production while at the same time ensuring high rates of production. The high rate of economic growth in china can also be attributed to the large size of government’s share in the economy. The Chinese economy is driven mainly by massive investment by the government rather than consumption by the private sector and much of the benefits of growth in GDP goes back to the state because of its large size. In contrast, much of the investments in the United States economy are by private individuals and hence much of the benefits of economic growth go back to individuals. The productivity levels in china are also higher compared to the United States. These levels have continually increased ever since the economic reforms of 1978. These economic reforms improved efficiency and productivity by introducing profit incentives to rural collective enterprises which though owned by local government, are guided by market principles, small private enterprises, family farms and foreign traders and investors. The reforms also freed many enterprises from constant intervention by state authorities hence creating a free market (Frankel, 2006). With regard to the balance of trade, the United States is registering continuously high trade deficits while the Chinese is registering a surplus balance of trade. Surging volume of exports of Chinese’s goods is due to their cheap prices in the international market. This can be attributed to the cheap supply of labor hence low production costs in china and hence cheap goods. A majority of manufacturing companies especially in the western world writes Frankel (2006) are also relocating much of their production activities to china. The impetus driving them towards this move is profit maximization using cheap labor. The goods and services so manufactured are then exported back to these countries and end up constituting exports from the Chinese market. Manufacturing makes up about 30% of china’s gross domestic product compared to united state’s 13% and this is what has led to the growth of its export of manufactured goods. Further, significant differences exist in the relative emphases on consumption and investments between china and United States. Private consumption accounts for approximately 65% of Gross Domestic Product in the US while in china it accounts for just 37%. Consumption trends are hence higher in the US compared to china which hence accounts for the higher volume of imports with a considerably low volume of exports (La Croix & Eby Konan, 2002). Exchange rates, rates of inflation and the trade accounts With regard to exchange rates between the two countries, China exchange rate is controlled by the government. The government fixes the exchange rate of the dollar and Chinese Yuan on each trading day and this fixing only applies to trade flows into and out of china only. The value of the Chinese currency is kept low in relation to that of its trade partners, especially the United States, the reason for this is to make the Chinese exports cheaper and hence more attractive in the international market. This is also done to eliminate the uncertainties on the part of Chinese exporters. This is what has further led to the huge increase in the Gross Domestic Product in china because the fact that she exports much in turn means that the country also produces much hence pushing up the GDP. According to Frankel (2006), another aspect that contributed significantly to the expansion in exports and imports during in China is the fact the country did away with the dual-track exchange rate system in 1994 and created a unified rate pegged to the US dollar, considerably depreciating the Chinese currency compared to the previous years. The resulting stability of her currency has granted a competitive edge to China’s already cheap exports and, at the same time, fueled foreign criticism of currency manipulation. In the United States, there exist no government policy with regards to interest rates and handling of this is left to the US Federal Reserve and the treasury. The US has adopted a managed free floating policy where the exchange rate is determined by the market forces of supply and demand. The inflation rates in china over for the period 1997-2010 approximately 1.8 while the same is 2.4 for the United States. The high inflation rates in china from 2007 are most probably as a result of a depreciated rate of exchange. The lower rate of exchange of the Chinese Yuan relative to other major currencies means the currency buys less foreign exchange which has succeeded in making Chinese exports cheaper while making imports expensive. The result is that the price of imported good goes up because they are expensive to buy from abroad hence leading to imported inflation. Cheaper exports also leads to increased demand for Chinese goods leading to an upsurge in domestic aggregate demand with the result being a demand pull inflation. There is also a probability that Chinese exporters buoyed by high export volumes would see an increase in competitiveness without making much effort may reduce their incentive to cut cost and therefore leading to higher inflation over the long term (La Croix & Eby Konan, 2002).. The United States trade accounts show a deficit. This is attributed to a strong dollar hence a high exchange rate. Strong dollar means that US companies can export less since their products cost more relative to foreign products and also makes imports cheaper. This net effect is that the United States can import more goods and services and export less. For the Chinese the trade accounts show a surplus which has been made possible by the exchange rate policies which encourage exports of goods and services while making imports to be expensive. The surplus can also be due to china reducing import barriers hence putting a downward pressure on domestic return to capital and hence an incentive to send part of the Chinese domestic savings to foreign countries. This would result into increase in trade surplus (La Croix & Eby Konan, 2002). Total Exports and Imports as a percentage of the GDP Expressing exports or imports as a share of GDP gives a much better understanding of the role of trade in national economies. Resource-dependent countries exhibit very high export-to-GDP ratios Total exports as a percentage of GDP and total imports as a percentage of GDP showed an increasing trend in china for the period 1997 right up to 2008 when the values dropped. The drop in the values is attributed to the financial crisis which affected many economies around the world during this period. From 2008 to 2011, there has been marginal rises and fall with clear lack of stability compared to the earlier years. The scenario was the same for the Unites States, although the figures for the United States have continued to rise steadily after the 2008 economic crisis. The steady increase in the Chinese figures could be attributed to China’s trade policies that are reflected in an aggressive, state-led modernization effort that makes maximum use of the pull of China’s large low-wage labor market to lure foreign direct investment from multinationals companies, while extracting the maximum amount of benefits in terms of technology, jobs and exports from those relationships. China economy is also rapidly moving from over reliance on low-tech products such as shoes and apparel into higher-technology products such as aircraft and parts, motor vehicles, telecommunication equipments and computers (Frankel, 2006). Conclusion From the above discussion, a number of things stand out which need to be corrected to spur sustainable economic growth in the two countries. The Chinese economy appears to be an export driven one. This may present problems in future because of the following reasons; China’s trade has long been structurally unbalanced, with overreliance on exports from traditional low skilled, resource and labor-intensive and low technology industries. There is need to rethink this strategy as Such structural imbalances cast doubt on the long-term sustainability of growth in trade and the economy. China’s trade is conducted disproportionally with a small group of countries like Japan, the United States, the European Union, South Korea, Taiwan, Australia, Russia and Canada. Such heavy trade dependence exposes China to much greater risks during economic slowdowns in partner trading nations. Finally, the pace of China’s growth has worsened a number of domestic social and economic problems such as widening income inequality and environmental problems fuelled by unsustainable, energy-inefficient industries, if left unattended, these problems may seriously hamper China’s long-term development goals and its effort to maintain social and economic stability. For the United States, there is need to end the overvaluation of the dollar to ease the prices on US exports and hence eliminate trade deficits. There is also need to eliminate incentives on off shoring as this leads to companies setting up manufacturing plants outside the US. References Frankel, J. (2006). On the yuan: The choice between adjustment under a fixed exchange rate and adjustment under a flexible rate. CESifo Economic Studies,52(2), 246-275. La Croix, S. J., & Eby Konan, D. (2002). Intellectual property rights in China: the changing political economy of Chinese–American interests. The World Economy, 25(6), 759-788. The World Bank, World Development Indicators (2014). [Data file]. Retrieved from http://data.worldbank.org/indicator Appendix Comparison tables of key economic variables between United States and China Table (a) :United States GDP in US$ GDP % growth Pop. Per Capita GDP in US$ CPI Inflation Rate (P%) Exports in US$ Imports in US$ Trade Balance in US$ Exports % of GDP Imports % of GDP 1997 8,608,500,000,000 4.51 272,657,000 31572.6 82.19 2.34 953800000000 1055800000000 -102000000000 11.1 12.3 1998 9,089,100,000,000 4.4 275,854,000 32949.0 83.47 1.55 952900000000 1115700000000 -162800000000 10.5 12.3 1999 9,665,700,000,000 4.87 279,040,000 34639.1 85.3 2.19 989200000000 1250600000000 -261400000000 10.2 12.9 2000 10,289,700,000,000 4.17 282,162,400 36467.3 88.18 3.38 1094300000000 1474400000000 -380100000000 10.6 14.3 2001 10,625,300,000,000 1.09 284,969,000 37285.8 90.67 2.83 1028800000000 1397800000000 -369000000000 9.7 13.2 2002 10,980,200,000,000 1.83 287,625,200 38175.4 92.11 1.59 1004700000000 1429700000000 -425000000000 9.2 13.0 2003 11,512,200,000,000 2.55 290,107,900 39682.5 94.2 2.27 1043400000000 1544300000000 -500900000000 9.1 13.4 2004 12,277,000,000,000 3.48 292,805,300 41928.9 96.72 2.68 1183100000000 1797900000000 -614800000000 9.6 14.6 2005 13,095,400,000,000 3.08 295,516,600 44313.6 100 3.39 1310400000000 2026100000000 -715700000000 10.0 15.5 2006 13,857,900,000,000 2.66 298,379,900 46443.8 103.23 3.23 1478500000000 2240900000000 -762400000000 10.7 16.2 2007 14,480,300,000,000 1.91 301,231,200 48070.4 106.17 2.85 1665700000000 2375500000000 -709800000000 11.5 16.4 2008 14,720,300,000,000 -0.36 304,094,000 48407.1 110.25 3.84 1843100000000 2556400000000 -713300000000 12.5 17.4 2009 14,417,900,000,000 -3.53 306,771,500 46998.8 109.85 -0.36 1583800000000 1976000000000 -392200000000 11.0 13.7 2010 14,958,300,000,000 3.02 309,349,700 48354.0 111.66 1.64 1843500000000 2362000000000 -518500000000 12.3 15.8 2011 15,533,800,000,000 1.7 311,591,900 49853.0 115.18 3.16 2101100000000 2669900000000 -568800000000 13.5 17.2 Table (b) : China Year GDP in US$ GDP % growth Pop. Per Capita GDP in US$ CPI Inflation Rate (P%) Exports in US$ Imports in US$ Trade Balance in US$ Exports % of GDP Imports % of GDP 1997 952653115243 10.00852 1230075000 774.46 95.4 2.81 207239347744 164416126144 42823221600 21.75391487 17.2587612 1998 1019461964545 9.297034 1241935000 820.86 94.6 -0.84 207425467935 163588780669 43836687266 20.34656271 16.0465801 1999 1083278591738 7.833347 1252735000 864.73 93.27 -1.41 220963938724 190322984400 30640954324 20.39770198 17.5691633 2000 1198474937925 7.619836 1262645000 949.17 93.5 0.26 279561110398 250687627297 28873483101 23.32640438 20.917219 2001 1324806909021 8.300318 1271850000 1041.63 94.18 0.72 299407708559 271321719429 28085989130 22.60010168 20.4800954 2002 1453827558028 9.082068 1280400000 1135.44 93.46 -0.77 365410447401 328026229282 37384218119 25.13437343 22.5629393 2003 1640958734582 10.02538 1288400000 1273.64 94.54 1.16 485027145934 449206175510 35820970424 29.5575468 27.3746174 2004 1931644329934 10.08504 1296075000 1490.38 98.21 3.88 658305423280 607131040740 51174382540 34.08005361 31.4307883 2005 2256902590825 11.31004 1303720000 1731.12 100 1.82 836622291920 712035037661 124587254259 37.06949052 31.5492144 2006 2712950885444 12.67653 1311020000 2069.34 101.46 1.46 1061475275398 852598274137 208877001261 39.12622529 31.4269705 2007 3494055942162 14.1624 1317885000 2651.26 106.28 4.75 1341649257032 1033754947075 307894309957 38.39804741 29.5861018 2008 4521827271026 9.634668 1324655000 3413.58 112.52 5.86 1581808351600 1232975817900 348832533700 34.9816182 27.2672029 2009 4990233518752 9.214199 1331260000 3748.50 111.72 -0.7 1333195516630 1113078004858 220117511771 26.71609478 22.3051286 2010 5930502270317 10.44699 1337705000 4433.34 115.43 3.31 1743376527432 1520379008924 222997518509 29.396777 25.6365977 2011 7321891954613 9.299885 1344130000 5447.30 121.67 5.41 2088956335177 1907128606494 181827728683 28.53028081 26.0469373 GDP rates of growth and the Trade Balance Source: World Bank; The World Bank, World Development Indicators (2014). 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